Gold was the first form of currency and is now used as a store of wealth. Gold has emotional, cultural and financial value. Different people across the globe buy gold for different reasons. As per the World Gold Council, the composition of 10-year average annual net demand in 2020 was as under:
What drives the demand for Gold?
Risk and Uncertainty: Gold is regarded as safe haven. When markets fall, investors buy gold. Gold is a natural hedge against inflation.
Economic Expansion: Growth in economy leads to long term savings and investments into gold.
Occasions: Weddings, Religious festivals, Anniversaries are the most popular occasions to buy gold, especially in India.
Central Banks: Buying by the central banks of the world seeking protection from weakening currency or as an inflation hedge.
FinFact:
As on 30th April 2021, India has 695.3 tonnes of gold (value ~ USD 38 billion) which comprises of ~6.6% of India’s forex reserves (~USD 590 billion). This is only the gold reserves held by the Central Bank and does not include household jewellery and coins
China produces (mines) ~400 tonnes each year (world mines ~3,500 tonnes annually), the highest by any country.
As on 14th May 2021, Global ETF holdings of gold stood at 3,592.6 tonnes valued at ~USD 212.5 billion.
The overall gold reserves is valued at ~ $10.5 trillion as on 2021
What are the investment options for Gold?
Traditional Options – Gold Jewellery, Coins, and Bars
Gold ETF
Gold Mutual Funds
Sovereign Gold Bond Scheme
Each of these investment options have its pros and cons. Let us understand what each option means and how they differ from each other.
*LTCG – Long Term Capital Gains
** STCG – Short Term Capital Gains
Apart from the above, one can buy Digital Gold from platforms like PayTm in digital format.
FinFact: Historical Returns of Gold:
Based on the above table, comparing the pros and cons of various investment options, we can conclude the following:
Physical Gold: The least preferred mode of investment due to high buy-sell spread, and high costs.
Gold ETF and Mutual Funds are preferred for short-term holding and availability of liquidity
Sovereign Gold Bonds are the most preferred if one plans to stay invested for a period of 5 years or longer. The added benefits are a fixed annual interest pay-out, low or no cost structure, tax free if held till maturity
Securities and Exchange Board of India (SEBI), the capital market regulator, has issued a consultation paper (dated 17th May 2021) proposing draft regulations where an investor can convert physical gold into ‘Electronic Gold Receipts’ or ‘EGR’. These EGRs can be traded like equity shares, and can also be converted back into physical gold. This is a great development for trading of physical gold and an interesting space to watch out for.
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One of the reasons to buy physical gold is to have a backup if the world goes crazy. It is a bit like bitcoin, but bitcoin is not physically traceable, whereas gold is. Gold per se does not give good returns, whether it is through ETFs or the RBI. The reason to invest in gold is to have gold with us as an emergency backup. To me non-physical gold makes no sense.
Thank you for sharing, it will be very helpful if you please share little more information on EGR.